Economics For All Your Decisions In Life - From Romance to Retirement

I'm Alaya.
One of the most stressful economic decisions we faced was
about the future of our relationship.
Relationships often face big decision points, should you get married,
should you have kids?
For us and many.
Other dual career couples, our first big decision point was
whether to restrict ourselves to only looking for jobs in
the same city.
The benefit of living in the same city is we
would get to see each other every day, but the
opportunity cost comes from the fact that it can be
hard for two people, particularly academics, to each find the
very best job for them in the same city.
The decision was about how big those benefits of being
in the same city were to us versus the cost
to our careers.
Not everyone will make the same decision we made, but
the framework provided by economics can help you think through
that decision. You want to compare the costs and the
benefits and consider the opportunity cost and the interdependencies.
The interdependence principle reminds us to think about how our
choices today might impact our future choices, and I know
that when it came to thinking about whether to live
in the same city, I thought about how that might
impact the future benefits of our relationship, as well as
how it might impact each of our career trajectories for
the rest of our lives.
In the end, we've chosen to live in the same city,
even though at various times it has meant one of
us turning down better career opportunities.
In today's episode of Think Like an Economist, we're going
to look at some of the big life decisions many
of us make and use the tools of economics to
think through how to navigate these decisions. I'm Betsy Stevenson, and.
I'm just AMORPHUS journalist and former economic student naz Trean
Tabacoli far joins us.
Justin, Betsy, turning down a job for a relationship is
quite a big deal.
Yeah, it's life changing. A different set of decisions may
have led to different career outcomes and different relationship outcomes.
Yeah.
You know, these big life questions can be so overwhelming,
and I think a lot of us procrastinate or we
just jump in without really thinking things through properly.
Yeah, like a lot of people procrastinate saving money for retirement.
It's not a well thought out choice. It's just that
making a retirement plan seems so overwhelming.
Yeah, and I have some friends who take that same approach.
When it comes to thinking about kids and starting a family,
figuring out if and when to have them can be
so overwhelming.
The economic talk it we're built in this podcast can
help make these kinds of decisions less overwhelming.
You can use the principles we've learned for almost any
life decision. It's like a supercharged way to make a
pro and conless that can help lead you to the
right decision for you when you break things down. It
can also help make those big life decisions seem a
little bit easier to think through.
I've already learned some big life to say through the podcast,
such as, when it comes to savings, we shouldn't waste
our time picking stocks or spending money on an analyst. Instead,
we should put our money into some index funds and
look for the ones with the lowest fees.
Well, I hope everyone is saving their time and money
with that tip, because that is what most economists do.
So let's apply these principles to one of the early
big life decisions we face, and that's borrowing money for college.
Betsy and Justin, I think you are the only people
I've heard who tell students that they should borrow more
money whilst they're students. I feel like generally society gives
us the message that we should be frugal, especially when
we're students and we're usually not earning any money.
Throughout the course of think Like an economist, we're trying
to get everyone to approach decisions differently. So on one hand,
you may think that borrowing more money means more debt
as a student, and now you see a bigger number
on your loan statement that means more money to pay
back later. That's all true, but if you focus only
on the debt, you're missing the most important part of
thinking about when to borrow and when to save.
What you're really making decisions about is when to spend
your money. You aren't earning much money while you are
a student, and you will earn more money when you
are older. The question is would you be better off
taking some money from your older richer self and giving
it to your younger self.
Here's a tool that I think can be really helpful.
I like to imagine my thirty year old self having
a conversation with my twenty year old self. They get
together and meet and try to decide how should we
allocate our money between the two of us. The truth is,
my thirty year old self was working, had a fair
bit of money. My twenty year old self had a
lot of opportunities, not much money, and a great deal
of needs. In that meeting, I think my thirty year
old self would willingly give money to my twenty year
old self. How do we do that by borrowing money
when we're twenty and repaying it when we're thirty.
I know my thirty year old self in that meeting
would tell my twenty year old self to spend responsibly,
But I also wish that I'd been able to have
that meeting and had agree to send more money from
my thirty year old self to my twenty year old self.
I was a responsible borrower as a young person, but
I did the thing that financial advisors tell you not
to do. I borrowed money for my final year off
a credit card, and if I could go back and
borrow even more, I would because I remember skipping things
that don't sound that expensive now, but at the time
I was so broke. I had to give up on
a lot of opportunities that I wish I could go
back and get.
But the thing is, debt sounds really scary and irresponsible,
So instead, why not take on a part time job
and try to earn more money that way.
That can definitely be part of the solution. But realize
time spend at work comes with an important opportunity cost.
It's time not spent studying or doing other things, so
make sure to balance those costs with the benefits.
For some people, a part time job is really important,
and I know that I had one when I was
in college, but I searched hard to try to find
one where I could actually study while I worked, or
that would actually help my studies in some way. It's
important that you value your time because if you take
that part time job and it prevents you from completing
your courses or doing as well as you could, you
know that's actually going to come with a pretty heavy
financial cost down the road. Because college is something that
builds human capital, a set of skills that leads to
higher wages in the future.
Remember we've talked about the returns to education, which economists
call human capital. By goeing to college, have the opportunity
to learn skills that will make you more productive. That's
why more education translates into higher pay.
And that's also why if you give up your time
while you're a student to work that could be really important.
You might need the cash, and believe me, I understand
that situation, but you could actually end up costing yourself
a lot down the line.
A college graduate will earn a million dollars more than
a non graduate over their lifetime on average. So every
year of your college degree, well, those years are actually
among the highest paying years of your entire career. You're
generating hundreds of thousands of future dollars. You don't want
to miss the opportunity to get those kinds of gains.
Remember that it's not just from completing the degree, it's
actually what you're learning while you're there. So if you
don't learn as much, well, your returns might not be
as big as those from someone who's able to actually
focus on their studies. That's why you've got to think
about your time and your money over time, not just
thinking about money today, but is it worth pulling some
money for the future so you can focus more on
your studies.
The bottom line is that you need to think of
college as an investment that you pay off over the
rest of your life and realize that when you borrow
money today, you're also making a commitment to pay that
debt off. You can live a better life as a
student if you live a somewhat worse life when you're working.
Given the income gap between your twenty year old and
thirty year old selves, it just might be a trade
off worth making. I know that when I graduated from college,
I couldn't spend all this new found money I was
earning because I had to pay off that credit card debt.
It was a trade off that I thought was worth making.
The next big life decision we're going to look at
is when to have a child. This is a big
deal for everyone, but due to biology, it's something that
a lot of women have to think about seriously and
also very carefully as well.
Well.
If you want the cliff notes version of what I'm
about to say, my advice to women in their late
twenties is, if you aren't ready to have a kid,
freeze your eggs. Okay, that's what I wish I would
have done. But since this podcast isn't about telling you
what to do, we should maybe have a more detailed conversation.
Right, It's about learning how to think about the problem.
So let's get into this.
Let's stop by using the cost benefit principle. When you're
thinking about when to have a child, you need to
weigh up the costs and the benefits of having a
child sooner versus waiting to have a child later.
The cost of waiting to have a child later, say
in your late thirties, which I'll be honest here is
what I did, is your fertility declines, it'll be harder
for you to conceive, and you run an increased risk
of miscarriage or health problems with the baby. But the
benefit of waiting is that it gives you more time
to establish your career.
Every year that women to life fertility has a big
impact on their entire career trajectory.
Research shows that as soon as women have kids, their
whole wage earnings career profile just starts to flatten out.
They don't get promotions as quickly, they don't get raises
as quickly. Every year you postpone having a child ends
up having huge benefits later on in your career.
So it's not just about what happens while you're pregnant
or while you're nursing. It's the trajectory that's affected for
the rest of your life.
It's sad but true. We just haven't figured out as
a society how to have women slowed down their career
and then speed it back up and get to the
same place they were going to get to.
The other major benefit of waiting to have a baby
is it gives you more time to search for the
perfect partner. Right bets right, justin the more time you
have to search for a partner, the more likely you're
going to find someone that you're going to be happy
parenting with for the next eighteen years or so.
Research gives us some insight into this as well. What
we see is that marriages that start in your thirties
last longer than marriages that start in your twenties.
Part of this is you give yourself a longer runway
to search for the perfect partner. Part of it is
you take longer and get to really know someone before
you commit to parenthood. And part of it is as
you age, you get to know yourself a little better,
and so maybe you approach parenthood with a bit more
self knowledge and maturity.
I made the decision in my early twenties that I
really didn't want to have kids until I was in
my late thirties, and I knew it was.
A big risk, but I also knew.
That being able to build my career was important to me,
and it was worth the risk of not being able
to have my own biological child.
And the whole point to our listeners is that this
isn't us telling you what to do. You don't necessarily
want to make the choices we made. The whole point
of think like an economist is to give you the
tools to decide what's best for you. And so for Betsy,
delaying motherhood so she could focus on her career was
a risk worth taking for her.
Betsy, at the start of the section, you said the
cliff notes were egg freezing.
You know, technology is always advancing, and these medical advances
have made it easier for women to have children at
older ages. But it's also the case that now women
can freeze their eggs and then conceive with a partner
that they've had more time to choose, you know, via
method like IVF.
Now we've been looking at when to a child, but
a more fundamental question may even be should you have
a child at all? Because we can't assume that starting
a family is the best decision for everyone.
Of course, there's no obligation for everyone to start a family,
you know. Betsy and I debated this at length too,
this whole question of should we even have children in
the first place.
So, like good economists, we gathered lots of data.
We really did. I have on my hard drive hundreds
of thousands of responses to surveys from people all around
the world, ask them things about how happy they are,
how much income they have, and importantly, whether they were
parents or not. And overwhelmingly I kept finding that parents
were in fact less happy than non parents.
But you know, there's actually more to life than being happy.
When I talk to parents and I ask parents, are
you glad that you had children? Most parents say yes.
They said that it filled their life with meaning and
purpose and that they felt richer.
There's an important lesson here for us economists. This time,
parents were teaching us economics, and it was that there's
something bigger for many of us than just happiness. Purpose
and meaning are important, and there are a lot of
things that people around the world willingly do that won't
make them happy, but add to meaning in their lives.
And so the fact that people who were parents still recommended.
It says to me that something matters beyond happiness, and
that's a lesson that applies not just to parenting, but
to running a successful economy.
To The final big decision we're going to look at
is about retirement, and more specifically, we're going to look
at when you should start saving money for retirement.
This is an important and scary decision. Retirement always feels
so far away, but for each of us, it's something
we've got to start thinking about seriously.
The right way to think about retirement is to think
about that conversation that your twenty year old self and
thirty year old self had about how to divvy up
the money between your thirty year old self and your
twenty year old self. But now you want to let
your seventy year old self in on that conversation too,
because what retirements about is also making a decision about
what you're going to spend in the years in which
you can't earn a lot of money. So it's a
lot like the decision you're making in your twenties.
This is what consumption smoothing is about. That's the term
that economists use for the idea that you want to
have a roughly similar quality and standardive living throughout your lifetime.
The idea here is that you don't want to have
any period in your life when you're just scraping to
get by. Rather, you want to take whatever income you
earn throughout your life, have a meeting with your twenty
year old and seventy year old and thirty year old self,
and allocate that money across time in a way that
makes sense for each of those future selves.
This is why economists focus so much and that marginal
principle thinking on the margin. If I spend one more
dollar today, how much joy will I get from that
extra dollar today versus this is how much joy would
I get from it if I was able to spend
it when I was seventy in retirement.
So that's the trade off your face spend today versus
spend tomorrow.
So justin just described something that sounds kind of simple,
but I have to admit it's really hard because you
have to be able to answer questions like what will
I want to do when I'm seventy, Will I be
ready to be retired, or will I be happy to
keep working, or will I want to travel the world.
So you do have to try to figure out how
you're going.
To want to spend your money and how long you're
going to want to work in order to be able
to make good decisions about how much money to save
for retirement.
Perhaps the most important uncertainty you face when thinking about
retirement is none of us know how long we're going
to live.
It's a very funny thing to say you face this
huge risk you could live a long time.
It is a risk, though, because if you live a
long time, you're running the risk of outliving your savings.
Let me be clear about that risk. You don't actually
really want to save to live for a really, really
long time. Like somebody listening to this episode right now
is going to live to be one hundred and ten.
If we all saved as if we were going to
live to one hundred and ten, then we'd all sort
of be spending too little during our living years because
we all unfortunately pass away without actually running out of savings,
with a lot of savings left over.
The thing I like about you, Betsy, is you're just
as willing to admit that there's a risk of spending
too little as a risk of spending too much.
Yeah, there is a risk of spending too little. And
this is where actually insurance can step in and help
us out.
It's actually what a.
Lot of government insurance schemes do is provide us something
like it's called an annuity. It's going to be a
fixed amount of money that we get every year until
we die. But even if you don't get that through
like a government or work based pension, you can often
buy annuities in the private sector. So you give up
a certain amount of money today in order to get
a stream of payments for the rest of your life.
And that is insurance that's worth having because none of
us know who is going to pull the lucky card
of living a truly, truly long life.
So we've looked at a few really big decisions in
this episode, borrowing more money as a student, when to
have children and if you should even start a family,
and also about when to start saving for retirement. What
is so interesting is that we can apply economic tools
to so many big decisions we have to make in life.
I'd like to think you can apply them too every
decision in your life. And that's not to say that
every decision is purely economics. It's that the economic toolkit
gives you a clearer lens so you can see the
underlying trade offs a little better and hopefully make the
right decisions.
For you if you think about those four principles that
we outlined in our very first season at the very beginning,
you know, we tell you things like think on the margin.
That's our marginal principle. And we talked about thinking about
the marginal benefit to you of a dollar as a
student versus as a thirty year old earning much bigger bucks,
or as a seventy year old in retirement. And we
talked on you know, when you think about whether to
have kids or not, you might be thinking should have
one kid, two kid, three kid? Again, we can sort
of use the toolkit to think and break it down
and think about each kid on the margin. So that
marginal principle is something that we use with almost every decision.
Fun fact, actually our youngest child is called marginal child.
And as we were trying to decide whether to have
marginal child or not, what did we do? We looked
deeply into each other's eyes on a candle at evening
and said, let's think about the costs and the benefits,
and truer words have never been spoken.
And of course, in order to think through the costs
and benefits, the first thing to start with is the
opportunity cost. Thinking through that opportunity cost was really important
to me because truth is, actually really love having kids,
and if I didn't think like an economist, we might
have a whole.
Pack of them.
And so listener, don't ever let anyone tell your economics
is romantic.
Is romantic?
It's not romantic, but it's going to lead you to
better and more clear.
Idea you meant isn't romantic?
You told me it is romantic.
Well, it lets you live the best life and.
That meanium to the longest life ever.
So you know, economics helps you think about making those choices.
And of course all of our choices are interconnected, so
that interdependence principle that tells us to think through if
I make this decision, how's it going to constrain my
future choices, how's it going to shape my future choices.
How's it going to affect people around you?
And how's it going to affect people around me? And
of course, as we started this episode, justin I had
to think hard about the interdependence principle. When we made
our decision to stick together as a couple living in
the same city and turning down some good job opportunities
to prioritize our relationship.
And so now we really can conclude that economics is romantic.
So this is the final episode of season three and
until we next meet. I'm actually really excited to start
applying a lot of these tools to all sorts of decisions,
from everyday things to some of the biggest decisions I'm
going to have to make.
And that's where i want to come to today's homework
for our listeners. What are some of the big decisions
you're facing right now and what are some ways you
can use these tools to make better decisions.
We'd love to hear how you're using the tools of
economics to make big life decisions, So if you want
to share, please tag us on Twitter.
I'm at Betsy Stevenson.
I'm at Justin Morpher's.
And I'm at and to have a Curly far And
I'm actually really excited to hear how people are going
to be using these tools, So do send those to us.
Betsy Justin, thanks so much. You've given us so much
to think about and to start applying so that we
can live our best lives.
Looking forward to hearing what people are up to.
Thanks NAS. It's great fun as alls